Fine Print - July 2010

Holes in the big tent

By G.D. Gearino

It’s necessary in these modern times, when discussing the issue of diversity, to tiptoe toward it carefully — if not step around it entirely. With that in mind, and being that classic fool who rushes in where wiser people dare not tread, I’ll start with this disclaimer: I’m all for diversity, the big tent, coats of many colors, multicultural stew or however you like to think of the effort to make any smaller group representative of larger society. But let me add, tiptoeing as carefully as I can, that matters of diversity are sometimes stretched beyond their natural usefulness. Case in point: the UNC School of Law’s recently released scorecard on corporate board diversity, which inadvertently reveals that lack of diversity maybe isn’t a bad thing — at least as far as stock performance goes.

The law school studied the makeup of boards of directors of the state’s 50 largest public companies (as ranked by Business North Carolina) and reshuffled their order from most to least diverse. Reynolds American Inc., the Winston-Salem cigarette maker, has the most diverse board in the state. Fully half its members are women and/or minorities. At the bottom were the 11 companies with boards populated exclusively by men of pallor. That was an improvement from the 2006 version of the survey, when 16 boards were white-guy clubs, but the law school pointed out that the North Carolina-based companies still lag behind the Fortune 100 in board diversity.

That’s interesting. According to the study’s director, professor Lissa Broome, “Diversity is an important measure of how well board membership reflects the greater society. It also serves as an indicator of corporate leadership opportunities for women and minorities.” Taking those two sentences in order, my reaction would be: 1) This is circular logic, asserting that diversity is important because, well, it’s important; and 2) this is a nonindicator, because board members almost always hold executive positions in other companies — they’ve long since availed themselves of those “leadership opportunities.” They’re already in the club.

In short, and because I’m reflexively suspicious of political correctness, I want to know why board diversity matters. I can think of many aspects of corporate governance that warrant attention — executive compensation, to name one. Just a few weeks ago, the CEO of what’s now Dex One Corp. (the Cary-based Yellow Pages publisher formerly known as R.H. Donnelley) was paid $15 million to go away after engineering an expansion that led to bankruptcy and wiped out shareholder equity. What board of directors rewards a guy for flying the plane into the mountainside? The answer, sadly, is corporate boards all across America. Executives frequently sit on the boards of other executives’ companies, with the result being that the people who are supposed to guard the interests of shareholders instead tend to look after their fellow big shots.

In case you’re wondering, four of Dex’s six directors are CEOs of other companies. And all six are men. Which fact is more significant? As far as I can tell, the first is revealing, while the second is irrelevant.

But if the survey won’t tell me whether diversity matters in a practical sense, rather than a theoretical one, there’s no reason I couldn’t take a stab at it myself. Accordingly, I spent a recent afternoon on the Bloomberg website checking stock prices of 10 companies — the top five on the law school’s list (which is to say, those with the most diversity on their boards), and the five that appeared at the bottom, all of which posted zeroes on the diversity scoreboard. I wanted to know two numbers for each: its five-year high and its stock price that afternoon. I didn’t seek to compare the companies to each other, because that would be an apple-and-orange situation; they’re in different industries and have weathered the recession with varying degrees of pain. I wanted to see how they fared against their own previous performance.

In the first group were Reynolds American; VF Corp., the Greensboro apparel maker; Winston-Salem-based Krispy Kreme Doughnuts Inc.; the Triangle’s Salix Pharmaceuticals Ltd.; and Hanesbrands Inc., another Triad apparel company. Of those five, Salix stock posted the best showing, trading at 83% of its five-year high. Krispy Kreme was the worst, at 27%. As a group, the share prices of the companies with the best board diversity averaged 66.8%.

The five companies in the no-diversity-here club were Polypore International Inc., a Charlotte maker of specialty filters; Cato Corp, a Charlotte clothing retailer; Speedway Motorsports Inc., the Concord operator of racetracks; Hatteras Financial Corp., a real-estate investment trust in Winston-Salem; and Thomasville-based trucking company Old Dominion Freight Line Inc., which was the champ of this group. Its stock traded at 93% of its five-year high, while Speedway Motorsports posted a 35% showing. But as a group, the second bunch did significantly better than the first. On average, the share prices of the survey’s diversity laggards came in at 72.8% of the five-year highs.

A bit awkward, no? But here’s the thing: I’d put my findings in the same interesting-but-not-significant category as the survey’s. There’s not much useful to be gleaned from either. It’s all white noise. Pun intended.